Outlook for Pittsburgh Region

At its 2006 annual meeting of the Allegheny Conference on Community Development, its chairman outlined the region's successes and pointed to the challenges that still impede economic growth in the Pittsburgh metropolitan area.

Jim Rohr, chairman and CEO of Downtown-based PNC Financial Services Inc., said one of the key impediments to this region's growth are residents who might not have a well-enough developed idea of the area's attributes.

"The region is at an all-time high for employment, which is lost on our community," said Rohr, who has chaired the conference since January.

As conference chair, Rohr oversees the privately supported research, marketing and business advocacy functions of the conference, which include the 50-plus regional economic development groups that form the Pittsburgh Regional Alliance.

A key focus for the conference in 2006, according to its CEO, Mike Langley, has been to better educate members and supporters on the respective roles of the conference and some of its member organizations. Rather than view the PRA as a subordinate under the control of the conference, Langley said PRA members should look upon the business development experts on the conference staff as assets.

More here.

Marketing in an Unpredictable World

It's time for producers of entertainment - movie studios, broadcast and cable TV networks, video game makers, publishers, music labels - to change the way they launch and market their products. In entertainment markets, a sizable portion of revenue is typically generated by a small number of blockbuster movies, best-selling books, and hit songs. But even talented, experienced executives acknowledge that predicting these hits is effectively a crapshoot. How else to explain why Miramax paid ten times as much for Happy, Texas - which grossed $2 million at the box office - as Warner Independent paid for March of the Penguins, which grossed close to $80 million?

What should entertainment companies do to improve their odds of success? The key is to understand that the outsize performance of hits is not driven solely, or perhaps even primarily, by intrinsic attributes such as sound, plot, style, or even star power. Rather, new research shows, much of the success of entertainment products derives from social influence - the effect that consumers have on one another's decisions. So in addition to anticipating which features individual consumers might find desirable, executives should adopt strategies that take social influence into account.

A study conducted at Columbia University by Matthew Salganik, Peter Sheridan Dodds, and Duncan J. Watts, and published in the February 10, 2006, issue of Science, sheds light on the role that social influence plays in driving aggregate consumer demand. More than 14,000 participants were recruited through the teen networking site Bolt, and the impact of social influence on their choice of songs to download was tested. After seeing a selection of 48 digital songs by unknown bands displayed on a Web page, participants were asked to choose songs to listen to and then allowed to download the ones they liked. As they arrived at the site, they were randomly allocated to one of two experimental conditions: "independent," in which they saw only the names of the bands and songs; or "social influence," in which they were further divided into eight distinct "worlds," and could see, in addition to the bands and songs, how many times each song had been downloaded by previous participants in their respective worlds.

There were three main findings. First, social influence increased the inequality of outcomes in all eight worlds, meaning that popular songs were more popular and unpopular songs were less popular than when participants made decisions independently. Second, however, which particular songs would turn out to be successful in any given world was more difficult to predict. And third, both inequality and unpredictability increased as the strength of social influence was experimentally increased. Overall, the "best" songs rarely did very poorly, and the "worst" songs rarely did very well, but any other outcome was possible.

These results suggest that the success of a particular entertainment product cannot be explained by any measure of intrinsic quality or even by "appeal" - the fit between the product's attributes and consumers' preferences. Rather, when people are influenced by what others think or do or buy, their individual choices interact in complicated and inherently unpredictable ways. In other words, experts fail to predict hits not because they are uninformed or incompetent but because hits are driven by complex networks of social influences that render accurate prediction of specific outcomes impossible.

The implication for marketing executives is that they should de-emphasize designing, making, and selling would-be hits and focus instead on creating portfolios of products that can be marketed using real-time measurement of and rapid response to consumer feedback.

To move in this direction, we recommend five strategies:

1. Increase the number of bets, and decrease their size. Acknowledging that hits can't be predicted would lead movie studios, for example, to plan for several relatively modest films costing, say, $30 million each rather than a few big-budget ones costing $80 million or more apiece.

2. Focus on detection, measurement, and feedback. E-mail and chat rooms, search engines, blogs, and online communities can accurately measure individual and group reactions to new products in real time. By tracking demand and satisfaction indicators as they emerge, and combining them with separately available sales data, marketers can tailor their campaigns to a rapidly evolving and unpredictable market.

3. Follow through with flexible marketing budgets. Marketing resources should quickly be reallocated from unsuccessful to successful bets as consumer demand materializes. Initial outlays should continue to be guided by prelaunch market research, but marketers should aim at a broader target population than that suggested by their data and intuition. More important, they should direct postlaunch resources at consumers who are reacting positively to the product, whether or not they correspond to marketers' initial expectations. Instead of unlocking the door to consumer demand, marketers should focus on finding and then pushing on doors that are already ajar.

4. Exploit naturally emerging social influence. Once a product has gained a following, marketers can amplify the corresponding social influence signal by directing the attention of a much wider audience toward the individuals or groups who are already enthusiastic about it. This strategy differs subtly but importantly from word-of-mouth or viral marketing strategies that seek to identify so-called influentials in order to solicit their endorsements. Instead, we suggest that marketers can, in effect, create influentials by selectively modifying social influence patterns as they emerge.

5. Build flexibility into supply chains and contracts. Supply chains should be designed to respond rapidly to a growth in demand for some products, artists, or services and a drop in demand for others. Firms can also expend less on the majority of flops, but still capture a share of occasional hits, by building flexibility into contracts with creative artists. For example, more generous royalties and offers of support that are pegged to an artist's success could be exchanged for less up-front investment in production, promotion, and distribution along with an option on any derivative revenues of the kind that superstars typically generate - from endorsements, concerts, and follow-up products.

Rapid changes in the technology of media production, distribution, and consumption are driving a proliferation of choices for consumers - the so-called long tail. Some believe that this trend will reduce the importance of hit songs, blockbusters, and best sellers, as sophisticated search algorithms enable audiences to find and consume increasingly niche-oriented forms of entertainment.

We believe, however, that precisely this proliferation of choice will further challenge consumers' limited capacity to discover and digest content, thus strengthening their tendency to like - or at least preferentially consider - what they think other people like. Meanwhile, social networking sites such as MySpace.com and Facebook, tagging sites such as Flickr and Del.icio.us, and user-generated content sites such as YouTube are increasingly exposing ordinary individuals to one another's decisions about what they watch, listen to, and buy.

Together, these trends point to a world in which successes will be more dramatic - and also harder to predict - than ever. Marketers should therefore abandon the notion that they can either anticipate or determine specific outcomes and instead develop their ability to measure and exploit consumer demand as it arises.

Source: Harvard Business Review, Sept. 2006

The Cost of Knowledge

"Knowledge management" in organizations has become synonymous with "knowledge searching." Web crawlers and other data-mining programs swarm over terabytes of documents and e-mails looking for clues that can help connect information seekers with sources. Clever icons adorning desktops promise to instantly deliver users to the right expert. Organizations deploy network analysis tools to identify their key knowledge brokers – people who provide directions and access to knowledge repositories. All this costs lots of money: A recent IDC study predicts that sales of enterprise information-search systems will rise about 25% a year, from nearly $1 billion in 2005 to some $2.6 billion in 2010.

Is this continued spending worthwhile? Maybe not. Our research on the costs of knowledge interactions, conducted through Babson College's Working Knowledge Research Center, suggests that, valuable as these efforts have been to date, future payoffs will depend less on enhancing systems that track down information than on devising strategies to help employees use what they've found.

As part of our study, we asked more than 200 knowledge workers in four very different organizations – the U. S. Defense Intelligence Agency, the testing service ETS, the drug firm Novartis, and the search institute Battelle – to keep a daily log over a ten-day period. For each of their knowledge interactions, they estimated the amount of time spent searching for knowledge, scheduling meetings with experts, eliciting expertise, and interpreting and applying the knowledge gained. All told, the participants recorded more than 3,000 interactions.

We'd assumed – as many managers do – that the employees would put most their knowledge acquisition efforts into finding out where information resided in the organization and then negotiating with each source for an opportunity to discuss it. In fact, as the chart employees spent, on average, less than 17% of their time searching and scheduling, and more than 80% eliciting, interpreting, and applying. The results are consistent across organizations and for workers of all ages, positions, and lengths of tenure.

This surprising finding suggests, first, that IT investments in search technologies appear to be working and that additional investments of the same kind are likely to yield only marginal benefits. Second, and more important, it suggests that managers should focus on understanding why some employees are more adept than others at gathering knowledge and customizing it for their own use.

Our preliminary work indicates that some people have tacit skills that can be codified and taught to others. Until managers can make that happen, though, we advise them to seek out those in their organizations who consistently do a good job applying newly gained knowledge – the customer relationship manager, for example, who has a knack for understanding how the new information he has acquired about his company's products will be relevant to his clients. Then watch how these individuals work, and look for common techniques. Chances are, you'll find clues about how to profitably shift the focus of your efforts from knowledge seeking to knowledge application.

Source: Harvard Business Review, Nov. 2006

Capturing the Ricochet Economy

As waves of immigrants come to developed countries from developing ones, many policy makers tend to focus on the downsides, such as strains on social services, competition for employment, and racial tensions. Largely overlooked is a huge emerging market that is spanning national borders: purchases and investments that bounce money back to expats' homelands. This is the "ricochet economy, "described by Vijay Mahajan and Kamini Banga in their 2006 book The 86% Solution.

The ricochet economy is growing at emerging economy rates. Its remittances to the developing world are second only to those generated by foreign direct investments. The dispersed "immigrant nation" feeding that financial flow has a global population equal to that of Belgium, Portugal, and Greece combined. Yet because this market isn't addressed by traditional organizational structures – which look at markets by country or region – many companies fail to see its potential.

They're missing big opportunities. In 2005, immigrants worldwide who worked abroad sent home more than $230 billion. Of that, $167 billion went to developing countries, according to World Bank estimates, an amount that exceeds the GDP of Singapore. Actual remittances from developed to developing countries are much higher, given the size of the informal economy, which by some estimates could add another 50 %or more to the official figures. And these are only the financial flows. Direct flows of goods, travel, phone calls, and other exchanges greatly increase the size of this ricochet economy. Expatriates are also major investors in venture capital firms and private foundations in their homelands, bringing knowledge and influence that cannot be measured in dollars alone.

Some companies that are recognizing the opportunities created by this market have launched "bank shot "businesses, which allow customers to select and pay for products in a developed country that are then delivered to relatives living in developing countries from local companies there – everything from bags of cement (Cemex)to retail products (La Curacao)to mortgages (Hipotecaria Nacional). Many banks, credit unions, and even nonbanks are directly facilitating the flow of remittances, including Western Union, Wells Fargo, the Spanish bank BBVA, India's ICICI Bank, Citigroup, and Bank of America. Retail giant WalMart is offering its U. S. customers money transfers to Mexico for less than $10 per transaction, and recipients who pick up the money at a Wal-Mart in Mexico receive an additional 20-peso (about $2) store gift certificate. While banks often have charged their customers prohibitive fees for such transactions, many now offer free or low-cost transfers, as well as services such as credit cards for relatives back home that are billed to account holders in the States.

Companies are also catering to immigrants through various media vehicles – from Web sites that connect immigrant groups around the world (such as sulekha.com, for the Indian community)to Spanish-language telenovelas and Bollywood films. Initially marketed to people who have moved overseas, many of these offerings are appealing, ultimately, to an even broader set of consumers. Cisneros Group of Companies – a privately held media, entertainment, technology, and consumer-product conglomerate based in Venezuela – was able to build on its investment in Univision and other U.S.-based Spanish-language media companies to launch a new prepaid cellular phone service (Movida) across the United States in just seven months. The service offers low-priced calling to Mexico and other Latin American countries. Many other companies have built their businesses through such synergies between developed and developing markets.

Every year, the opportunities grow. Are you capitalizing on them? What percentage of your customers are immigrants who have family members abroad? How can you facilitate the flow of goods or remittances back home? Do you need a "country "manager for this invisible nation?

Source: Harvard Business Journal, Nov. 2006

Welcome to ED Futures Update

We know that timely information about what's happening in economic development is important to you. That is exactly what this update issue is all about.

Enjoy!

Don Iannone Publisher, ED Futures
Email: dtia@don-iannone.com
Tel: 440.449.0753

State Tax Competitiveness

Wyoming has the nation's best tax climate for businesses, while Rhode Island has the worst, according to a new study.

The study, conducted by the Tax Foundation, a nonpartisan research group based in Washington, focused on five major areas: income taxes, business taxes, sales taxes, unemployment taxes, and property taxes.

The rankings consider not only on how high taxes are, but also on how they are implemented. According to the study's authors, a good tax system levies low, flat rates across a broad base, treating all taxpayers the same.

A system that unevenly taxes different industries, on the other hand, is less favorable, because it makes it less likely that business decisions will be made in response to market forces.

Top-ranked Wyoming was followed by South Dakota, Alaska, Nevada, and Florida. Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; and Florida has no individual income tax.

Read more here.

Entrepreneurs Generous!

When it comes to charitable giving, self-made entrepreneurs are more than twice as generous as millionaires who acquired their wealth through inheritance, according to a new study.

The study, which included nearly 1,000 respondents across the nation with household income above $200,000 or a net worth of at least $1 million, found that entrepreneurs donated an average of $232,206 per year, according to researchers at Indiana University's Center on Philanthropy.

By comparison, donors who inherited their wealth gave an average of $109,745 annually, the study found.

Those whose net worth came from savings, return on investment, and real estate tended to be less generous to charities, the study found.

Yet, beyond the dollars, researchers also discovered a strong correlation between the size of donations and the amount of time a donor spends volunteering for a cause.

Read more here.

Industry Snapshot: Aerospace and Defense

Is Aerospace and Defense important to your community or state? Listen up.

Revenues within the US aerospace and defense industry have improved considerably after a 1.4% slump in spending on commercial aircraft caused by a weakened tourism market in the aftermath of 9/11. Increased spending during the recent Gulf War did buffer industry growth rates somewhat and the industry is expected to reach a value of $464.3 billion in 2004.

Defense expenditure is still the leading source of revenue for the US industry, essentially due to the substantial and ever increasing defense budget of the US Government. Projects such as the missile interception network and the revamp of the US armed forces account for a large proportion of this spending whilst providing welcome revenue boosts for companies such as Boeing during the decline in aerospace spending.

Increasing cost pressures within the aerospace industry have resulted in massive reform as aircraft manufacturers attempt to cut costs whilst producing cost-efficient, highly marketable aircraft to promote sales and stimulate growth within the industry. Growth in defense expenditure has served to compound the problems for the aerospace industry as leading players reduce their aircraft production in order to concentrate their resources on their defense outputs.
Major players within the US aerospace and defense markets include Boeing, Northrop Grumman, Lockheed Martin, General Dynamics and Raytheon. The initial reaction towards Boeings prototype 7E7, expected to enter service in 2008, has confirmed the huge market potential for midsize, fuel-efficient aircraft in the US whilst proving that cost-effective air travel does not necessarily rely on high capacity aircraft. However, the launch of the new Airbus A380, the worlds largest passenger jet, is expected to impact on the sales volumes of Boeings 747 in the international market.

Key Issues

Threat of Terrorism - Efforts to prevent terrorism in the US have swelled defense expenditure whilst increasing costs within the aerospace industry. New regulations, in terms of in-flight security and anti weapon systems, are increasing airlines liabilities, spreading the costs throughout the supply chain and affecting the potential purchasing behavior of airlines, reducing their expenditure on new planes.

Cost Pressure - Rising oil prices, augmented by the demand for low cost air travel, have caused deficits for airlines, which have cascaded along the supply chain. In reaction to this, aircraft manufacturers are increasing outsourcing efforts and developing longer-term contracts with more select groups of suppliers in order to cut costs. In addition, the use of alternative materials to aluminum and steel, such as composites and titanium, and the fly-by-wire concept are a growing part of the strategy to offer airlines cost-efficient operation over the lifetime of the aircraft.

Increasing Military Expenditure - The formation of the Homeland Security Department (HSD) and the creation of a missile interception network have come in a period of increased defense spending in reaction to the growing terrorist threat and the Second Gulf War. With a budget of around $40 billion, the HSD has already introduced legislation to improve the safety of air travel, with cost consequences for airlines, which will pass throughout the supply chain.

Technological Innovation - As NASA continues its development towards a next generation space vehicle, the demand for a publicly accessible space platform has prompted several initiatives within the aerospace sector to produce a viable option. Amongst other projects, the development of high-speed rocket replacement technologies such as anti-matter production chambers and ramjet engines could usher in a new era of space and air transport and possibly provide an answer to the airline industrys dependence on crude oil.

Shift from Aerospace into Defense - In response to escalating cost pressures from airlines and the reduced capacity of the aerospace industry, aircraft manufacturing companies have begun to concentrate their production efforts into the defense industry to exploit the growth in military spending and maintain revenue streams. The development of the F/A 22 and Joint Strike Fighter configurations and the production of the US missile defense network include contributions from most of the aerospace industrys leading players.

Consolidation - Reduced demand and yields within the airline industry have produced cost pressures, which have resulted in consolidation amongst the airlines. This consolidation has increased the airlines buying power, causing a downward pressure on costs, reducing margins for the aircraft manufacturers and promoting consolidation in a cascading effect along the supply chain.